Unlike other real estate ventures, land development can be much riskier and requires a lot more financing to get off the ground. In those cases, developers will typically try to secure acquisition and development loans to help fund the project. However, these loans can be tricky to get, and you may have to go through some lengthy approval processes to get there.
So, with that in mind, we want to illustrate the basics of development financing; how it works, what you might need to qualify, and the benefits of working with a loan broker during the process.
The Basics of Development Loans
Unlike other financings for real estate projects, these loans are designed solely to purchase and develop the land. That means that there can’t already be buildings or construction on the site. In those cases, you would want to secure a construction loan (more on that later). Also, these loans usually last between one and three years.
In many instances, these loans are used to both purchase the property and to finance the bulk of development costs. If you already own the land, you can still get a development loan, but you won’t get as much.
Another thing to consider is that these loans typically don’t cover the full cost of the real estate project. Most of the time, developers and borrowers need to submit a substantial down payment to secure the funds. In some cases, you can use an existing property as collateral, but that can impact the level of funding you receive.
Qualifications Necessary for a Development Loan
As you can imagine, most lenders don’t want to provide this kind of financing to untested investors or developers. Because of this, you will usually need to satisfy several qualification requirements before getting approval. In most cases, lenders will need:
- A Real Estate Portfolio – past development projects you have successfully completed
- Collateral – in most cases, the land itself is collateral, although you can provide a mortgage to another building in some situations
- Exit Strategy – you should be familiar with this already, but you need to illustrate what you plan to do with the property and how you’ll exit the deal once the project is complete
Depending on where you plan on building, you may also need to worry about zoning and permitting. Many lenders will pay attention to various market details, such as regional demographics, the political landscape, and the local economy. If these elements don’t look appealing (or could potentially derail the project), lenders will often deny financing.
In those instances, it can sometimes be better to work with local governments to adjust zoning laws in your favor. Also, talking with the community can help build support for the development, giving extra confidence to the lender.
Development vs. Construction Loans
As we mentioned, acquisition and development loans are for parcels of land without any buildings on it already. If there are properties, even if you plan on demolishing them, you will need to secure a construction loan instead. Construction loans can be used for a wide array of projects, including renovations, additions, improvements, and others.
Usually, these loans are designed to last about three years, and they don’t require as much legal paperwork as development loans.
How a Broker Can Help
If you haven’t secured acquisition and development financing before, the process can seem complicated, lengthy, and arduous. Trying to navigate through the various hurdles can potentially derail your project, particularly if you don’t know what you’re doing.
In these situations, working with a broker can be a life-saver. Even if you have gotten development financing before, having an experienced broker on your side can help you get a more favorable deal.
Here are a couple of reasons why you should utilize the services of a commercial loan broker.
Compare Loans
Brokers can work with different lenders to find the right financing for your project. While some lenders may require extra verification and qualification, others may be more accommodating. Not only that, but you can compare loan details such as the total amount, interest rates, and terms.
Save Time and Energy
Filling out paperwork and submitting it to the lender can be exhausting. Let your broker take care of all of the details for you so that you can focus on other parts of your business. Also, working with an experienced broker ensures that you don’t forget any documents or fill them out incorrectly.
Contact Us Today
Don’t let your real estate development project stall because you can’t get the right financing. Let our dedicated and experienced team help you get the funds you need to move forward. We know what it takes to work with lenders, and we can provide insight into the best way to protect your investment. Call us or visit us online to get started and see how we can assist you.